One of the first things we tell our clients when they onboard with us is that they must separate their personal transactions and expenses from their business ones. Without separation, your finances can become muddled, confusing, and messy.
Say you spend $65 on office supplies from you business account. Totally fine. Next you spend $50 on groceries on your business card; that’s not a deductible expense. Lastly you spend $35 on you personal card for the business but that is deductible. Confused? Yeah. These are called “messy books” for a reason.
The myth of “messy books” is something we hear about every day with small business owners and founders confused about their own financials. What’s the first step in being proactive against messy books? Separate out your personal from your business expenses.
Taking care of your books day to day throughout the year is important, but this is especially true when tax season comes around. The key to your tax return is having accurate financials. Your financials tell you how you’re really doing. You can’t know your exact financials if some of your expenses are personal and don’t belong on the business ledger—no matter size or structure of your business, those expenses make an impact.
If your books only include the business expenses, then filing your taxes becomes incredibly easy. All you have to do is tally your business expenses and income for the IRS. With everything in one place, it’s nearly as simple as saying “here they are,” organizing the transactions into categories, and reporting them.
If the expenses are in more than one place, meaning in business accounts and personal accounts, you have to put in even more work to sort them out. Someone will have to look through those bank statements. Seeing as how your accountant can’t read your mind, you’re really adding more work for yourself. So, using your business account for personal stuff is a big “no, no."
Using your personal account for business expenses means you could over pay on your taxes because remembering to deduct the business expenses could get forgotten or time-consuming. This is especially a big trap for startup founders bootstrapping their efforts. It’s smarter to just set up a business bank account than to let this go on too long.
Don’t get hung up on needing a business card. It can be a personal credit card or simply an account that you deem to be a “business” account. But once the company starts making and spending money regularly, you should think about opening up an actual business banking account.
To avoid all the confusing and time consuming chores of combing through transactions, simply take the steps towards organizing your personal and business accounts to keep them separate.